Predatory Mining Charter draft a major negative for junior miners

South African mining companies say that the new iteration of the Mining Charter will have a greater dilutory impact on capital providers’ returns than the previous charter, setting the country’s mining sector on a potential anti-investor trajectory. Simply put, South Africa will be unable to compete for capital on the international market if investors believe their capital interest will be diluted with each new iteration of the charter.

At the time of writing, the Department of Mineral Resources (DMR) and industry remained locked in discussions around the draft as part of a public comment process that will end this month. Despite energetic contentions by industry, however, few material changes to the legislation – which minerals minister Gwede Mantashe wants finalised by November – are expected.

But the new charter appears to leave emerging juniors and new entrants more exposed. This is largely due to the clause requiring new projects and companies renewing mining rights to re-establish a 30% black economic empowerment (BEE) shareholding, including 10%-points of free carry (a non-transferable 5% each for employees and local communities). The latter carries a dividend of 1% of earnings before interest, tax, depreciation and amortisation (EBITDA) from the sixth year of a mining right unless an ordinary dividend is paid.

This clause is likely to make a lot of projects uneconomic, while requirements for new prospecting rights under the draft charter are unclear and appear to be at the discretion of the minister.

Aside from the free-carry provision, there are also limitations on the timing and divestment of new rights as well as vesting schedules. The BEE entrepreneur shareholding must vest as follows: 15% in the first quarter of the mining right, 50% in second quarter, 70% in the third and 100% by the end of the last quarter of the right.

Nedbank Corporate & Investment Bank said in an investment note in June that the proposed charter implied a roughly 20% asset value loss, based on their calculations.

“It [creates] a situation where a mining company has to fund 100% of the capital investment of a mine or project but will only receive 90% of the benefit. This could materially impact the economics of mining projects and could make marginal orebodies uneconomic, in our view,” Nedbank analysts Leon Esterhuizen and Arnold van Graan said.

Said Oliver Bayley, senior exploration geologist, SRK Exploration Services SA: “There is good potential for discovery and exploitation of smaller mineral deposits in South Africa that have not been worthwhile for the larger players – who have historically held much of the ground – to pursue. An improved regulatory environment would help support the goal of a home-grown junior exploration and mining sector, as the kind of investors needed by this segment are sensitive to issues related to sovereign risk and tenure.

Speaking to Miningmx, Concentrate Capital Partners head, Paul Miller, is blunt in his views. He believes the charter is indicative of a lack of acknowledgment by policy makers that South Africa needs to attract foreign capital into the mining industry, and that this is a competitive endeavour.

Importantly, Miller sees this increase in the BEE shareholding requirements from 26% to 30% as an indication of the trajectory of ongoing dilution of capital providers returns.

“It’s not that this charter is better or worse than the last one, it’s the trajectory that’s the issue, and we need to realise that there will be a ‘Charter 4’ in five years and a ‘Charter 5’ five years after that, and that this is a gradual improvement in local ownership that means a gradual reduction in returns to capital holders. That’s not what you do to attract capital,” he says.

An improved regulatory environment would help support the goal of a home-grown junior exploration and mining sector, as the kind of investors needed by this segment are sensitive to issues related to sovereign risk and tenure

Emerging sentiment in the industry is calling for the promulgation of separate regulations for established miners and new mining entrants, exempting from certain requirements and thus promoting investment in exploration.

So says Orion Minerals CEO, Errol Smart, who was recently appointed as the representative of the Junior and Emerging Miners Leadership Forum of 200 small-scale miners to sit on the Minerals Council South Africa board.

Commenting in his personal capacity, Smart says that junior and greenfields mining should be treated almost as a separate industry, with a relaxation of certain elements of the charter.

“When you find new orebodies, they still need to be taken through the development search. There needs to be an understanding that the national asset doesn’t yet exist at this stage. Someone has to invest before the mineral actually becomes an asset.

8 COMMENTS

  1. Yet another example of progressive and encroaching theft.
    This will not stop until intelligent people possessing strong moral compasses, raise their voices against this rising tide.
    When given the opportunity to make a statement against it, most public figures wither and weakly follow along with the rhetoric. Perhaps fear of being ostracised and losing their positions of privilege is the reason.
    Well, there is a consequence in that. If they do not open their mouths and speak, they will lose not only their positions but far more than just that.
    Watching an interview, with the head of Nedbank darting around the question of expropriation without compensation is an example of a lost opportunity to state it for what it is and denounce it.
    Being too afraid to vigorously defend what is right, is the beginning of the end.

  2. Unless you have spend time in government you will not understand what is happening.
    No one in dmr gives one bit for investment. They do not understand business nor do they care. Their only focus is transformation at any cost…with off course the added bonus of sharing in the fruits!!! Thus you all can make comments and write nice stories… but exploration is dead in this country unless the dmr drastically changes their attitude. The current legislative environment do not encourage investment… ask anyone who seeks investment for projects. SA is a no-go zone.

  3. The investors they must come. We will take all their mines. We will take all their land. We must be free from this colonialist oppression.

  4. The anti-transformation tirade never ceases to amaze me! The Apartheid benefactors will squeal and cry-wolf just for them to continue economically enslaving blacks in the country of their birth. The biggest evil being the CoM ( or sorry they have changed their name to whatever). I for one have commented. Borrowing largely from the experience of Indonesia where the mining industry is thriving and it’s mainly owned by indigenous Indonesians.

    That was not the case in 1980-1990. They introduced legislations to effect this ownership pattern change and they succeeded.I say copy the Indonesians!

  5. Dear Goldspeculator. Please do not get me wrong. I am all for transformation and especially the assistance to new entrants in the mining sector. The major companies have, for far too long has a monopoly on resources in SA.
    My biggest concerns are that DMR is so determined to drive transformation that they forgot to regulate the industry. How long do you wait for the granting of a right? How long do you wait for a simple section 102 or 11 application.
    Look at the current legislation. Its a mess.
    The ones struggling most due to the DMR’s mess are the new entrants and in most of cases companies who are properly transformed and not hiding behind cleverly worded BEE agreements which did not benefit any HDSA persons.
    I am saying again. DMR must push for the return of exploration in SA. But that will mean that DMR must get their house in order. We are competing against the rest of the world and therefore our Government must render a world class services to its clients.

  6. Transformation is a thin veil that mobsters wear in order to rob productive and intelligent entreupreneurs. Black or white.

    Those punting the rethoric have absolutely no clue what capitalism is and why it creates wealth.
    Transformation in South Africa has been nothing short of displacing wealth creating individuals with wealth destructive ones. There-in lies the proof of transformations failure.

    South Africa is a free country and the economy WILL TRANSFORM ITSELF in time without interference from the so called, social justice brigade or perhaps it is better to just say mob.

    • If “South Africa is a free country and the economy WILL TRANSFORM ITSELF in time without interference….” then
      Why was Apartheid so effectively executed that today it has yielded penurious blacks in RSA? What is the timeline?

      I think the people “without a clue of what capitalism is” are those who fail to appreciate barriers to success & pillars of prosperity….. Or should I just call them ignorant diapers ( “self absorbed & soiled”)!

      No entrepreneurs have ever been displaced anywhere on earth ….The only people who get displaced are rentseekers and those whose success if depended on access due to their privileged upbringing!

      • What difference would a timeline make on the outcome of the matter?
        Where are the barriers to success in a free country?
        Is South Africa free?
        What is transformation? Is it redistribution of what is, to those more deserving, or is it the growth of what could be, to all?
        Do perseverance, morality, character and talent play any part in success or is success dependant on upbringing only.
        The South African economy is officially shrinking. The only people that grow an economy are entrepreneurs. Shrinking this group = shrinking the economy.
        “No entrepreneurs have ever been displaced anywhere on earth”, broad statements without supporting facts are based purely on opinion and are rooted in fantasy.
        Yes, rent seekers are in fact displaced but not for their upbringing but based on their personal performance metrics. Access in SA today is not based on upbringing but rather on law as gazetted by the South African government which includes privilege laws such as BEE and AA.
        The world has many rags to riches stories and these very tales are what inspire people to be better than their upbringing!

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